Understanding the Medical Device Tax Enacted With the Affordable Care Act

With the enactment of the Affordable Care Act in 2010, several new tax provisions were to be implemented over the ensuing couple of years. One of these tax provisions is the Medical Device Excise Tax that went into effect on sales of taxable medical devices after December 31, 2012. This tax affects all taxpayers who are the manufacturers, producers, or importers of medical devices. Unlike sales tax, which is passed on to a taxpayer’s customers, this tax is imposed on the taxpayer/manufacturer/importer.

Many taxpayers may still be unaware that they are subject to the 2.3% excise tax on the sale of Medical Devices and failed to file the first Quarterly Federal Excise Tax Return (Form 720) on April 30, 2013. The next filing deadline for the 2nd Quarter is rapidly approaching and will be due on July 31, 2013.

A taxable medical device is defined as any device (as defined within the Federal Food, Drug, and Cosmetic Act) intended for humans.  The term “device” is further defined as an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component, part, or accessory which is:

1. recognized in the official National Formulary, or the United States Pharmacopeia, or any supplement to them,
2. intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals, or
3. intended to affect the structure or any function of the body of man or other animals, and which does not achieve its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of its primary intended purposes.

Unless expressly exempted, any medical device is subject to the Medical Device Excise Tax.  Internal Revenue Code Section 4191 specifically exempts eyeglasses, contact lenses, hearing aids, and any medical device generally purchased at retail for individual use (also referred to as the “retail exemption”).

There has been much discussion about repealing various portions of the Affordable Care Act, and the Medical Device Excise Tax has been one of the more heavily debated areas regarding repeal. However, until the Medical Device Excise Tax is actually repealed (if even repealed), compliance is mandatory for those taxpayers who may be regarded as manufacturers, producers, or importers of medical devices.

If the tax liability exceeds $2,500 for the quarter, then semi-monthly deposits are required.  Due to the complexity of the provisions of this Act, the IRS, within Notice 2012-77, has provided temporary penalty relief from the underpayment penalties for timely deposits for the first three quarters of 2013.

Marcum has a dedicated team of professionals with experience assisting taxpayers in the understanding of the Medical Device Excise Tax rules, as well as, experience in ensuring taxpayers are compliant with the filing requirements.  If your company may be subject to the Medical Device Excise Tax or if you have any questions regarding the tax, please reach out to your Marcum tax professional.